The Revenue Agent Who Audited the Form 1120 Filed by LCW

question 80

Multiple Choice

The revenue agent who audited the Form 1120 filed by LCW Inc. recharacterized $125,000 of the salary paid to Ms. Lewis (LCW's president and controlling shareholder) as a constructive dividend. LCW's marginal tax rate is 21%, and Ms. Lewis' marginal tax rate is 32%. Which of the following is not a consequence of the recharacterization?

• A) LCW's taxable income will increase.
• B) Ms. Lewis' taxable income will increase.
• C) Ms. Lewis' payroll tax liability will decrease.
• D) Ms. Lewis' income tax liability will decrease.